Multinational Companies’ Hedging Effectiveness of Foreign Exchange Risk: A Quantitative Comparison Study

Abstract

To investigate hedging effectiveness of multinational companies in respect of using currency derivatives, the author adapts an innovative and multi layers GJR-GARCH-based model. This model broke down the currency risk faced by MNCs in each business area and added six control variables other than foreign sales ratio, all these variables have been proved to be related to MNCs’ currency risk exposure but was not included into previous models. Moreover, this model absorbs advantages of several models built in previous studies and combines them into a whole, intact model. This paper also employed a wide research scope, using a sample of 48 non-financial and 28 financial firms headquartered in USA. Also, comparison between financial and non-financial firms is an innovation of our research. According to the result, hedging of non-financial companies in respect of currency risk is ineffective, and financial companies are more likely using currency derivatives to speculate.